Lease With integrity | How To Foster Trust, Fairness In Landlord-Tenant Relationships

Would you pay more cash rent than you had to? John and Jack Scott did. In January, following an excellent year for crop yields and prices, the Gilby, ND, farmers sent a voluntary cash bonus to their landlord, John Botsford, Grand Forks, ND.

“It’s a matter of conscience. We want to be fair,” says John Scott.

“I didn’t expect a bonus,” says Botsford, who owns a farm-management and real estate company. Yet, he leases his 160-acre farm west of Gilby to the Scotts at what Jack says is “a very reasonable rate” because he trusts his tenants to treat him fairly “when we have a good year.”

Such an open-ended lease isn’t right for everyone, of course, Botsford says. But the Scotts and their landlord are a good example of how integrity and fair dealing lead to win-win arrangements. In today’s competitive land-rental markets, Botsford says, “What’s most important is good landlord-tenant relationships.”

American agriculture’s leasing culture usually works well, says Bruce Johnson, a University of Nebraska agricultural economist. Still, he’s seeing more cases of questionable ethics in leasing. “And the extremely volatile prices are exacerbating this trend,” says Kansas State University Ag Economist Kevin Dhuyvetter. He and Johnson agree about the key elements of ethical leasing: honest, candid communication; mutual respect; good farming practices; and fair, up-to-date, written agreements.

Jack Scott, 54, is the fourth generation of his family to farm in the fertile Red River Valley, where his great-grandfather settled in 1880. He and his father, John, raise 5,600 acres of corn, soybeans, wheat and edible beans.

They rent half their cropland, working with about a dozen landowners, including local families, retired farmers, investors and heirs who live out of the area. Some of their relationships with landowners go back generations to the 1930s. And until recently, all their rental agreements were handshake deals backed up by the Scott family’s reputation for integrity.

The main responsibility for ethical leasing falls on the tenant, Dhuyvetter says. That’s because tenants almost always have an information advantage over landowners – who may be older and vulnerable, removed from agriculture or living far away.

Tenants, by contrast, are well aware of local rents and land values, crop prices, yields, profit potential and risks, he says. “So tenants usually have much more relevant information than landlords. With that informational power comes a responsibility not to take advantage of the landlord.”

To start, Johnson says, owners are entitled to know about crop yields, farming practices and production issues on their land. Yet many landowners who call him for advice about rental rates have no idea what their farm’s yield history is. Periodic newsletters, emails or photos are a good way to keep landowners in the loop.

Tenants should also help their landowners understand current rent trends, Dhuyvetter says. He routinely gets calls from landlords or heirs who haven’t changed cash rents for many years. “The landlord’s response typically is: ‘We didn’t know.’” Tenants counter: “The landlord never asked for more rent.”

While Dhuyvetter acknowledges that landowners have a duty to keep up to date on markets, he believes that “tenants should help make this information readily available. You, the tenant, are the best source of information, but you have to be honest.”

That’s how the Scotts see it, too. Recently, for example, Jack Scott told one of their landlords: “We’re going to have to pay you more rent to keep up with what’s happening. I mentioned it to him because I feel he needs to hear it.”

After talking it over, they settled on a fairly modest rent increase because as the owner said, “It’s awfully hard to lower it.”

It’s true that cash rents are “sticky,” or slow to fall when farm income drops, Dhuyvetter says. That’s partly because they don’t go up as fast as farm revenues, either. He often hears tenants justify their lack of candor on this subject by saying that rent doesn’t come down when crop prices fall.

“But that’s not actually true.” Although cash rents do rise over time, survey data from Kansas, Missouri, Nebraska and Oklahoma suggest they go down 16-30% of years, he says; other data suggest similar values in Iowa.

For their part, landowners should not rely on “coffee shop talk” about cash-rent rates, Johnson says. Reliable sources of cash-rent information include state Extension Service surveys and the USDA Agricultural Statistics Service, which publishes average cash rents by county (http://1.usa.gov/nnjRoj).

Landlords must also recognize that their cash-rent tenants bear all the crop-yield and price risk, Johnson says. So, “negotiated rents need to be able to move in both directions in order to be fair. It’s a two-way street.” And because the farm economy is so volatile these days, he adds, it’s “critical that both landowner and tenant work to keep their agreements current.”

John Botsfordowns many farms himself, and also oversees the management of about 40,000 acres of farmland for Bremer Bank. When it comes to selecting tenants, he considers more than rental returns. “We look for responsible, top-notch producers. We want to put the right people in place and leave them there so they commit to the land.” This approach is good for everybody, he says. “We have very little turnover, and the land is well cared for.”

Like most farmers, the Scotts take pride in treating their rented land the same way they treat their own land. John’s father was such a good farmer, he says, that one of their landlords accepted a 25% share lease instead of the standard one-third. When people asked why, the landlord used to say: “Well, 25% of Scott’s crop is bigger than 33% of yours.” People liked the way my dad took care of their farms and improved their land, John says.

John and Jack have the same philosophy, Botsford says. “They are known for being as good a farmers as there are in the Red River Valley.”

One of the best ways to foster good tenant-landlord relations is to “treat the farm like a business,” Dhuyvetter says, using sound business practices, such as objective financial analysis and written leases. In the long run, he’s convinced that integrity in leasing is good for business. “Often the result of poor ethical behavior is higher turnover of tenants,” which is expensive for everybody.

Still, that’s not why landlords and tenants should be fair with each other. “Ethical behavior should emerge because it’s the right thing to do,” Dhuyvetter says.

Unethical or just good business?

Is paying below-market cash rent for good land unethical, or just smart business practice?

What about offering above-market rent to get land away from the current tenant?

And what’s wrong with using your greater knowledge of local rental markets to your best advantage?

It’s not always easy to distinguish between unethical behavior and savvy dealing, says Kevin Dhuyvetter, an ag economist at Kansas State University.

One test he applies: Have you, the tenant, been honest and candid with your landlord? Have you strived to keep the owner informed of current rental rates? There’s nothing wrong with a landlord giving you a break on the rent, he says, as long as concessions are made with full knowledge.

But if your attitude is, Why should I pay more rent if the landlord doesn’t ask for more, “it looks like unethical behavior,” Dhuyvetter says. That’s especially dishonorable if you’re dealing with elderly landlords, who are often vulnerable or out of touch, says Bruce Johnson, a University of Nebraska Extension economist.

What about paying above-market rent to lease a new farm? If you offer more money because you can operate the land profitably – due to your management abilities, economies of scale or growth potential – that’s fine in Dhuyvetter’s book.

But if you deliberately overbid to acquire the land and then let the rent stagnate in coming years because it’s not profitable – or worse, beg for lower rent, taking advantage of your landlord’s reluctance to change tenants – that’s not ethical, Dhuyvetter says.

The real litmus test for ethical dealing is whether you “Can you look at yourself in the mirror at the end of the day?” Dhuyvetter says.